Four presentations from Central Bank economists were made at the recent Dublin Economics Workshop, reflecting a range of research activity on the commercial real estate, enterprise credit and interbank markets. Paper titles and a brief description below.
Eoin O’Brien and Maria Woods: “Applying a macroprudential risk analysis to Irish commercial real estate prices”
Research focuses on Irish commercial real estate market and presents a range of indicators that can be used to assess the sustainability of prices and enhance the Central Bank of Ireland’s existing macroprudential risk assessments of this sector. Developing analytical tools to identify real estate risks, among other areas, is a priority for policy makers focused on mitigating systemic risk. To complement traditional statistical indicators of price misalignment such as the deviation of the price-to-rent ratio from its historical average, two reduced form models are specified drawing on the property literature and long-run Irish data (1985Q1 to 2013Q4) to approximate a fundamental price series. Periods where actual prices deviate from this fundamental series can be identified over the sample. Non-linear methods suggest that the relationship between price changes and estimated misalignments may vary over the property cycle.
James Carroll, Paul Mooney (Dept of Finance) and Conor O’Toole: “Irish SME Investment in Economic Recovery”. Link (p73).
An in-depth look at the types of SME engaging in investment during the economic recovery, along with the financing sources behind said investment. Key findings:
- The share of SMEs investing has increased steadily since 2012, and currently about a third of SMEs are investing on a six-monthly basis.
- Younger firms, controlling for other firm characteristics, invest more. Improvements in profitability and turnover are important drivers of investment.
- SME investment responds to regional economic conditions, as measured by the unemployment rate.
- Smaller, younger, non-exporting firms, who are likely more reliant on local household spending, respond most to domestic conditions.
- Investment is mainly financed through internal funds, and there is no evident increase in the external financing share since early 2013.
James Carroll and Fergal McCann: “Cross-country comparisons of SME borrowing costs”
This research provides a methodology to strip out borrower- and bank-related factors which may form part of the explanation for cross-country interest rate differentials. Using the case of UK and Irish lending by Irish-owned banks, the research suggests that, of a 240 basis point (bps) difference in raw average borrowing costs, about 100-150 bps is not explained by bank- and borrower-level characteristics and can therefore be attributed to market-level factors such as bank competition, collateral enforceability and the aggregate outlook for default probabilities. Earlier research from the two authors shows that across Europe, such aggregate factors are indeed associated with higher enterprise borrowing costs.
Paul Lyons and Terry O’Malley: “Monitoring Ireland’s payments system using Target II”
- Research provides a description of Ireland’s component of the Eurosystem’s large value payment system (TARGET2-IE).
- TARGET2-IE forms an important part of the Bank’s analytical toolkit in that it can be used to examine the degree of interconnectedness between banks in Ireland; to develop indicators for systemic risk monitoring; to map Ireland’s payment networks to provide a source for measuring price and quantities in the short term interbank loan market involving Irish banks.
- Early research results identify differences between the interbank and customer payments networks with the customer payment network displaying a small number of highly connected banks in addition to a large number of isolated banks.